FAQs Before Buying a Franchise

Have you decided to start your own business by buying a reputed company's franchise? If yes, then you might have certain questions about the entire process of franchising. Here at BusinessZeal, we have tried to answer a few of them.

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The parent company, known as the franchisor, looks for potential entrepreneurs who can take their business forward, by providing them with franchising opportunities. The franchisor allows these franchisees to use their trademarked name and run the business according to the parent company's business model. For this, sufficient training and support is provided by the franchising firm. BusinessZeal has put forth a consolidated list of the most common FAQs that you might have while buying a franchise.

Once you have made the decision of setting up such a business, the next step would be to evaluate the kind of business on offer by the franchising company. Package franchises have a pre-defined business model and guidelines that are laid down by the parent company. Product franchise gives liberty in terms of administrative style. Check with the franchising company about the type of entrepreneurship model that is available.

Is the franchise necessary in the first place?

The first and foremost question when you are zeroing in on the franchising firm is to check whether such a business arrangement is necessary or not. Customers prefer to buy new cars from company outlets or dealers. On the other hand, fast-food joints prefer selling via franchises to increase sales. Evaluate for yourself if the company you wish to deal with actually needs one.

Which document should I refer to know about the company's history and daily operations?

Before you buy a franchise, the parent company will give you a copy of the Franchise Disclosure Document (FDD). This document will contain information about the company's financial and material status. This document is compulsory by the Federal Trade Commission (FTC) mandate, and should be provided to you at the time of discussions regarding the deal. Read all the details of the copy carefully and, if necessary, consult an experienced entrepreneur about the same.

The franchising company will surely have other members in their franchising system. Ask the parent company about the other members in detail. If the firm has a number of franchises, it indicates that it is a booming firm. You can refer to the FDD for further details on the same.

How is the franchisee territory decided by the franchisor?

If the firm has a number of franchisees, there may be chances that these are located close to each other. If this is the case, it can be alarming for your business. Check with the franchisor about the various parameters that determine the territory.

What initial amount do I need to pay to the franchising company?

This question will often be answered straightaway. The fees of the firm will be the initial amount that you need to pay to get franchise rights of the business. However, some companies have additional pre-opening fees which may be hidden from you. Get yourself educated about the total initial investment costs before finalizing the deal.

How much royalty does the franchisor charge? How does he calculate it?

The royalty fees charged by the franchisor are calculated as a percentage of the sales. However, some companies have fixed flat fees while some charge around 3 to 6 percent of the gross sales figure. Thus, it is necessary to know the minutest details regarding the royalty fees.

There will never be a straightforward answer to this question. However, you can consult other franchisees in the franchising company's franchising system about their profit margins. This should give you an idea about the market reputation and sales figure of the company.

Does the franchisor adhere to corporate etiquette?

A healthy relationship is necessary to take the business forward. Thus, it is important that your work relationship with the franchising company is on healthy terms. To find out the work culture at their end, visit their office and talk to people around. You can also contact the existing franchisees to know their experiences with the franchising company.

Will the franchiser support me after I set up the franchise?

Once the franchise is set up, it is necessary that the parent company supports you until your business is fully established. This help can be in terms of finances, advertisements, making marketing strategies, or building contacts with potential customers. Get these terms cleared before making the deal.

How would I know if the franchising company is legal?

Frauds are everywhere, and the franchising business is not exempt. There are companies which cheat new entrepreneurs. The best way to find out whether the company you are dealing with is legitimate or not is to check with the Federal Trade Commission, the Better Business Bureau, and the other franchisees.

Check the FDD to get the contacts of the existing franchisees. Contact them, find out about their businesses, and know whether it is a good idea to enter into such a setup with the parent company.

What kind of training will be provided by the franchisor? What will be its duration?

The products that the franchisor is trading in might be new to you, and therefore, it is necessary for you to gather as much information as possible about the product. Check with the franchising firm about the training schedule, and make sure to attend it.

What are the franchisor's future expansion plans?

It is better to know what your franchising company is up to in the future. If they have concrete plans about the future, it will provide an opportunity for you to grow with the firm. However, if their future plans are not concrete enough, you may want to deal with other firms as well. Talk it out with the representatives of the parent company.

Is my territory exclusive?

The amount of business that you will receive depends on the number of similar franchises in the vicinity. There are certain businesses that need exclusive territory. Check with the parent firm whether your territory is exclusive or not.

How does a franchise agreement work?

The franchise agreement is the legal document where the obligations of both franchisor and franchisee are laid. It will contain all terms of business relationship, like initial fees, royalties, help and support, license terms, renewal terms, etc.